The value of the bond is $$10000.$ Bond Basis with market CDS spread of $3\mathrm{.}25\%.$ Suppose that a $5-$year bond and $5-$year CDS $($described on slide $15)$ are both issued on April $1,2022.$ On May $1,$ the CDS spread is $3\mathrm{.}25\%$ and you open an arbitrage trade. On May $15$ the CDS spread rises to $3\mathrm{.}57\%.$ Suppose you choose to close out the basis trade on May $15.$ Explain the process and the total profit that you would receive. $($Assume that spreads on all CDS contracts must be paid annually, at the end of each year that the CDS is outstanding. Thus an investor who buys a CDS on January $1,2022$ must make the first spread payment on December $31,2022,$ and an investor who writes the same CDS receives the first spread payment on that date.$)$Suppose that keeping the trade open in $**$Step $1($b$)**$ requires the fund to place $\backslash \backslash$$$100$ of its own cash into a margin account. The cash earns a $0\backslash \%$ rate of return while the trade is open. Consider two possibilities for what the fund can do with its $\backslash \backslash$$$100$ cash, if it does not place it in the margin account:

$-$ On May $15,$ your fund identifies another arbitrage opportunity, that over the next two weeks should generate a return of $\backslash \backslash$$$300$ for each $\backslash \backslash$$$100$ of own funds invested. The fund cannot invest in this trade if it place $\backslash \backslash$$$100$ cash in the margin account.

$-$ On May $15,$ the fund does not have any other arbitrage opportunity available. Its best available option is to buy risk$-$free U$.$S$.$ Treasury bonds, which would earn interest of $\backslash \backslash$$$0\mathrm{.}5$ for each $\backslash \backslash$$$100$ of own funds invested.

Explain how the different scenarios affect the fund's decision of whether to close the CDS$-$Bond Basis arbitrage trade or keep it open for two weeks.